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“I Need 20% Down” and Other Home-Buying Myths About Mortgages

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“I Need 20% Down” and Other Home-Buying Myths About Mortgages

Tips for shopping around for a mortgage — even if you think you don’t qualify.

Illustration of man with megaphone shouting numbers at woman

Think you’re not ready to unlock home ownership yet? That the financial hurdles are too high? You may be short-changing yourself. Many of the things renters believe about home-buying are myths.

Here’s the real deal.

Myth: I Have to Put Down 20%. 🙁

Saving 20% of the price of a home in many places isn’t just a challenge; it’s a roadblock. And it’s not a must-do. In fact, the median down payment for first time buyers is 7%.

How can you become part of the less-than-20 club?

 

 

Your Stress-Free Guide to Shopping for Home Loans

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Your Stress-Free Guide to Shopping for Home Loans

With this super-simple breakdown of loan types, you won’t get overwhelmed — you’ll find the right mortgage.

How to choose a mortgage when buying a house

When it comes to buying a house, most people know what they prefer: a bungalow or a condo, a hot neighborhood or a sleepy street.

Mortgages, too, come in many styles — and recognizing which type you should choose is just slightly more involved than, say, knowing that you prefer hardwood floors over wall-to-wall carpeting.

First things first: To pick the best loan for your situation, you need to know what your situation is, exactly. Will you be staying in this home for years? Decades? Are you feeling financially comfortable? Are you anxious about changing loan rates? Consider these questions and your answers before you start talking to lenders. (And before you choose a lender, read this.)

Next: You’ll want to have an understanding of the different loans that are out there. There are lots of options, and it can get a little complicated — but you got this. Here we go

Mortgages Are Fixed-Rate or Adjustable, and One Type Is Better for You

Let’s start with the most common type of mortgage, that workhorse of home loans — the fixed-rate mortgage.

A fixed-rate mortgage:

  • Lets you lock in an interest rate for 15 or 30 years. (You can get 20-year loans, too.) That means your monthly payment will stay the same over the life of the loan. (That said, your property taxes and insurance premiums will likely change over time.)

It’s ideal when: You want long-term stability and plan to stay put.

Here’s what else you need to know about fixed-rate mortgages:

  • A 30-year fixed-rate mortgage offers a lower monthly payment for the loan amount (for this reason, it’s more popular than the other option, the 15-year).
  • A 15-year fixed-rate mortgage typically offers a lower interest rate but a higher monthly payment because you’re paying off the loan amount faster.

Now let’s get into adjustable-rate, the other type of mortgage you’ll be looking at. 

An adjustable-rate mortgage (ARM): 

  • Offers a lower interest rate than a fixed-rate mortgage for an initial period of time — say, five or seven years — but the rate can fluctuate after the introductory period is over, depending on changes in interest rate conditions. And that can make it difficult to budget.
  • Has caps that protect how high the rate can go.

It’s ideal when: You plan to live in a home for a short time or you expect your income to go up to offset potentially higher future rates.

Here’s what else you need to know about adjustable-rate mortgages:

  • Different lenders may offer the same initial interest rate but different rate caps. It’s important to compare rate caps when shopping around for an ARM. 
  • Adjustable-rate mortgages have a reputation for being complicated. As the Consumer Financial Protection Bureau advises, make sure to read the fine print.

A general rule of thumb: When comparing adjustable-rate loans, ask the prospective lender to calculate the highest payment you may ever have to make. You don’t want any surprises.

Conventional Loan or Government Loan? Your Life Answers the Question

Which fixed-rate or adjustable-rate mortgage you qualify for introduces a whole host of other categories, and they fall under two umbrellas: conventional loans and government loans. 

Conventional loans: 

  • Offer some of the most competitive interest rates, which means you’ll likely pay less in interest over the period of the loan.
  • Typically you can get one more quickly than a government loan because there’s less paperwork.

Who qualifies? Typically, you need at least a credit score of 620 or above and a 5% down payment to qualify for a conventional loan.

Here’s what else you need to know about conventional loans:

  • If you put less than 20% down for a conventional loan, you’ll be required to pay private mortgage insurance (PMI), an extra monthly fee designed to mitigate the risk to the lender that a borrower could default on a loan. (PMI ranges from about 0.3% to 1.15% of your home loan.) The upshot: The lender has to cancel PMI when you reach 22% equity in your home, and you can request to have it canceled once you hit 20% equity.
  • Most conventional loans also have a maximum 43% debt-to-income (DTI) ratio which compares how much money you owe (on student loans, credit cards, car loans, and other debts) to your income — expressed as a percentage.

Fannie Mae and Freddie Mac set limits on how much money you can borrow for a conventional loan. A home loan that conforms to these limits is called a conforming loan: 

  • In most cities, the maximum amount for a conforming loan is $453,100. 
  • In high-cost areas, such as New York City and San Francisco, the limit is $679,650.
  • Limits are revisited annually and are subject to change based on each area’s average home price.

A home loan that exceeds these limits is called a jumbo loan:

  • Jumbo loans typically require a higher down payment (up to 30% for some lenders) and a credit score of at least 720. Some borrowers can qualify while putting down 20%, but their credit score has to be higher. 
  • They also tend to have stricter debt-to-income requirements, generally allowing for a maximum DTI ratio of 38%.

There are practical considerations to take into account before getting a jumbo loan too, mainly: Are you comfortable carrying that much debt? The answer depends on your current financial situation and long-term financial goals. 

Government loans:

  • Include loans secured by the Federal Housing Administration (FHA), U.S. Department of Veterans Affairs (VA), and the U.S. Department of Agriculture (USDA) Rural Development.
  • Are meant to stimulate the housing market and enable folks who may be unable to qualify for conventional loans to still become homeowners.

Who qualifies? That depends on which government loan you’re looking at.

If you’ve had trouble qualifying for a mortgage because of income limitations or credit: 

FHA loans are used by a broad swath of people, including those with lower credit scores and income. 

  • You can get an FHA loan with a down payment of 3.5% if you have a minimum credit score of 580. You can still qualify with a credit score below 580 — even with no credit score — but the down payment and other requirements will be much higher.
  • FHA loans conform to loan limits set by county; these limits typically range from $294,515 to $679,650 in high-cost areas. You can view the FHA mortgage caps for your county at hud.gov.
  • If you get an FHA loan, you must pay an upfront mortgage insurance premium (MIP) and an annual premium of 0.85%. Currently, the MIP is 1.75% of the loan amount — so, $1,750 for a $100,000 loan. This premium can be paid upfront at the mortgage closing, or it can be rolled into the monthly mortgage payment. 

Also, a heads-up — the date an FHA loan was issued affects the MIP. 

  • If you received an FHA loan on or before June 3, 2013: You’re eligible for canceling MIP after five years, but you must have 22% equity in your home and have made all payments on time.
  •  If you received an FHA loan after June 3, 2013: To stop paying MIP, you’d have to refinance into a conventional loan and have a current loan-to-value of at least 80%.

If you’re in the military, a veteran, or a veteran’s spouse:

  • VA loans offer active or retired military (or a veteran’s surviving spouse) a mortgage with a 0% down payment. 
  • VA loans also can have more lenient credit requirements — typically around a minimum 620 credit score — and lower DTI requirements.
  • The VA only allows lenders to charge 1% maximum to cover the costs of originating and underwriting the loan, so you save money at closing. There is, however, an additional upfront, one-time funding fee of 2.15%. 

VA loans also don’t charge borrowers mortgage insurance — potentially helping you save a significant chunk of cash on your monthly payment.

Given the benefits, a VA loan is often the best mortgage option for people who qualify.

If your income is limited and you live in a small or rural town:

USDA loans are mortgages for limited-income home buyers in towns with populations of 10,000 or less, or that are “rural in character,” meaning that some areas that now have bigger populations are grandfathered in. You can see whether your town is eligible on the USDA’s website. 

  • USDA loans typically have lower interest rates than non-USDA loans.
  • Down payments can be as low as 0%. 
  • USDA mortgages also have more lenient credit score requirements than conventional loans. 
  • Income limits to qualify depend on location and household size. 
  • USDA loans charge an upfront mortgage insurance fee of 1% of the loan amount and annual mortgage insurance premium of 0.35%. 
  • And USDA loan borrowers must buy a “modest home” — a property with a market value deemed reasonable for the area, though the USDA does not set specific price limitations.

Only a select number of lenders offer USDA loans; here’s a list of USDA-approved lenders nationwide. 

If your job is to help people:

Niche programs, like the Neighbor Next Door from HUD, allows teachers, law enforcement officers, first responders, and government workers — as much as 50% — on eligible homes in revitalization districts. 

Note: Downpayment assistance programs offer qualified buyers such things as grants and interest-free loans. Start with your state’s housing finance agency to find options.

Now You Know the Basics. It’s Time to Call for Backup

Speaking of your lender: Ultimately, you’ll be working with your loan officer or broker to narrow down these choices, and to find a loan that works for you and your finances. (Just another reason why it’s important to choose a lender you’re comfortable with.)

Your real estate agent should be able to offer some insight, too. And because they don’t earn a paycheck from your loan selection, their advice about mortgages should be impartial.

You know your stuff. And you know whom to ask for help. Who’s overwhelmed? Not you.

 

 

 

 

 

How To Maximize Your Listing: Hunting Properties

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How To Maximize Your Listing Hunting Properties

The Highest and Best Use. All in this industry know the value of this term, but are we consistently applying it in an effort to truly maximize the features of your latest listing? In researching ranch and land property listings across the United States, it is evident that there may be value being left on the table. Sometimes this value can be significant, but agents may gloss over it as just another feature. I’m talking about hunting properties. I’ve come across numerous listings with some of the best access to hunting and/or might even qualify for landowner tags that in some areas are worth thousands of dollars; and the listing has nothing more than a bullet point that says Hunting. In order to maximize the value of highest and best use, let’s look at how we can better represent and convert hunting into positive dollar value.

The Outdoor Industry’s Effect on Land Value

The wildlife recreation industry is a $110+ billion industry and, of that, over $25 billion comes from hunting alone. In the West, agricultural land is rapidly being converted for recreational uses. According to the CCIM Institute, “demand for both improved and unimproved recreational property has contributed to rising rural land prices. An increased interest in outdoor recreational hobbies as diverse as hunting and bird-watching, a graying baby-boom generation that is more conscious of the investment potential in vacation and retirement properties, and low interest rates have come together in the past five years to create a niche market for recreational land.”

How Access to Hunting Affects Property Values

As the outdoor industry continues to grow and access to public lands continues to shrink, land with hunting access has become highly desirable. Hunting properties provide a buyer with the perfect mix of recreation and investment. Passive cash-flow opportunities include the leasing hunting rights, in addition to grazing and leasing land for farming. According to CCIM, in many cases, a hunting lease can bring in more than five times the revenue from cattle grazing. Simply stating hunting on your listing doesn’t sound like nearly enough to communicate the value that the land truly holds in its highest and best use case.

How To Better Market Your Hunting Property

As a broker, how can you leverage the indiscernible value of a property with hunting amenities? A good place to start is to create a section in your listing dedicated to the hunting amenities. You may be leaving money on the table and doing your client a disservice to just list “hunting” as a bullet point. If you are not a hunter or don’t know much about the area, this can be easier said than done. So how can you find out more information quickly and inexpensively? Start with your local Parks and Wildlife office, as the rangers can help orient and qualify your search metrics. Also, consider jumping online and research the area around your client’s property, to see what kind of access public land access is available.

Consider becoming knowledgeable in your states hunting laws to determine if that property qualifies for landowner tags. For example, in Illinois, 40 acres is the minimum required to obtain a Deer tag for shotgun season, whereas western states may require a contiguous quarter-section worth of acreage, or more, to qualify. There is significant value in this knowledge, and it is well worth the time spent researching the finer details. To recap: here is a list of some key items to research and market on your hunting land listing:

  • Hunting Access: What is the nearest public land access or is the property large enough to hunt on
  • Wildlife Population: What is the wildlife population in that area? Big game, small game, waterfowl, and/or upland bird hunting
  • Revenue Opportunities: Does this property qualify for landowner tags and how many? Are you able to turn the land into a hunting lease?

These are three key elements that can offer more value to a hunting property, and a good starting place for any agent. However, if you find a trusted local contact who is a hunter and that has the right tools and knowledge of the area, you can consider putting together a spectacular Hunting Guide that is sure to impress any prospective buyer. There are also a myriad of companies throughout the US with dedicated teams of hunters and outdoorsman, who can help in putting together a complete hunting and outdoor recreation analysis to be used to bring considerable value to the unseen benefits of a property. Consider reaching out to your local RLI chapter or use the Find A Land Consultant search tool provided by RLI for help in finding a consultant who can provide maps with public land access, hunting units, species migration patterns, hunting tag draw odds, landowner tag information, and more.

As land is being converted to recreation and access to public lands is shrinking, there is more value than ever before in hunting properties. The right buyer for a hunting property will know its inherent value, but don’t miss the target in marketing it appropriately, for achieving that highest and best use should be a guiding, as well as an inherent, principal.

 

 

The Secret to Programming Your Thermostat the Right Way for Each Season

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The Secret to Programming Your Thermostat the Right Way for Each Season

Programmable thermostat

Before you get started, you’ll need to pick a programmable thermostat you’ll actually use. Here’s how.

According to a study by the Lawrence Berkeley National Lab, nearly 90% of Americans say they’ve rarely (or never) programmed their thermostat because they’re not sure how to do it.

But it’s really not that hard, and it’s definitely worth doing because it can save at least 10% a year on heating and cooling costs.

The U.S. Department of Energy says you can achieve that 10% by turning your thermostat back 7 to 10 degrees F from it’s normal setting for 8 hours a day.

The first step is to pick the thermostat that best suits your scheduling needs so you can “set it and forget it,” an approach the Energy Department advocates to get the most savings.

Pick the Right Thermostat

There are four types of programmable thermostats, each with a distinctive scheduling style:

7-day programming. Best for individuals or families with erratic schedules, since this is the most flexible option. It lets you program a different heating/cooling schedule for each day of the week. 

5-1-1 programming. One heating/cooling schedule for the week, plus you can schedule a different heating/cooling plan for Saturday and Sunday. 

5-2 programming. Same as 5-1-1 programming, except Saturday and Sunday will have the same heating/cooling plan. 

1-week programming. You can only set one heating/cooling plan that will be repeated daily for the entire week.

You’ll need a program for both the cooler months and the warmer months.

TIP: Before buying a programmable thermostat, identify the type of equipment used to heat and cool your home so you can check for compatibility. For example, do you have central heating and cooling, or just a furnace or baseboard heating? Otherwise, you may not reap the rewards of energy savings and may risk harming your heating and cooling equipment.

Change the Factory Settings

Most programmable thermostats have a pre-programmed setting that’s supposed to be for the typical American family. But what family is typical these days? You need to adjust the thermostat’s settings so it’s in sync with the life you and your family lead instead of some mythical family.

Programming options are based on:

  • Wake Time
  • Sleep Time
  • Leave Time
  • Return Time

The Department of Energy suggests the following settings as an energy-saving rule of thumb:

Winter months:

  • For the hours you’re home and awake, program the temp to 68°F.
  • Lower at least 10 degrees for the hours you’re asleep or out of the house.

Summer months:

  • For the hours you’re home, program air conditioning to 78°F.
  • For the days you don’t need cooling, manually shut off the AC. Keep in mind, it will kick back on if the house gets too warm.
  • Program it to be warmer than usual when you’re out of the house.

Here are a few programming timing tips that can help you create the best set-it-and-forget-it heating and cooling schedule for your home:

  • Shut down heat or air conditioning 20 to 30 minutes before you leave home each day.
  • Turn on heat or air conditioning 20 to 30 minutes before you come home each day.
  • Reduce the heating or cooling 60 minutes before you go to sleep each night.
  • Increase heating or cooling about 30 minutes before you wake up each morning.
  • Spend time tweaking your program for a few days to make sure it feels right.

TIP: With a Wi-Fi-enabled thermostat, you can control your home’s temperature while on the go. That way, you’re not wasting energy if you’re running late or forgot to create a new program before going on vacation.

FYI: A furnace does NOT have to work harder to warm a house after the temperature has been set low during the day.

Use a Wifi Thermostat to Make It Super Easy

Want something that’s simpler? Newer more high-tech models have simplified the process:

The Nest Learning Thermostat: It creates a custom heating and cooling schedule for your home based on motion detection technology. Plus since it is Wi-Fi, it can be controlled remotely. Price: Usually a bit more than $200.

Honeywell Wi-Fi Smart Thermostat: This device makes it easy to create a custom heating and cooling plan. Unlike conventional programmable thermostats, it has a large color interface that displays a simple menu that walks you through all the programming steps. It also “learns” your home and will send you personal notifications if the temperature is not right, or if there’s a power outage. Price: Usually under $200.

FYI: Thermostats made prior to 2001 may contain mercury. To see if your programmable thermostat contains mercury, check with the manufacturer. If you decide to dispose of a thermostat that contains mercury, check out how to do so safely in your area at Thermostat Recycling Corp. (Not sure why mercury is so bad? Here’s the skinny: It’s toxic and it never breaks down. When it enters the waste stream, it permanently damages the ecosystem.)

Adding Recreational Value to your Property

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The majority of the buyers in my market are typically looking for properties with two characteristics: timberland for an investment and hunting for recreation. However, there aren’t many properties that ideally fit both characteristics. Sometimes I scratch my head, wondering why there aren’t more people willing to play the role of a developer and convert timber tracts into recreational retreats for profit. While it’s rare for an established hunting retreat to hit the open market, the properties that do, usually justify their price premium and get purchased quickly.

Timber real estate investment trusts (REITs) and investors are realizing that recreational value on many properties is now exceeding the timber value, which in turn justifies selling the property for a substantial profit. While there are many different ways to add recreational value to a property, I’ve decided to focus on one particular property, as it’s a great example. The main goal behind the property is continuing to operate a pine plantation for investment purposes, however, have the means to hunt, fish, and enjoy the property recreationally year-round. Here are some ways this property was able to achieve this goal:

1. Created Food Plots

While it does take some time and money to prepare a food plot, the end result will benefit wildlife and keep them on your property.  This requires cutting timber, removing the stumps, liming and fertilizing the soil, and figuring out what and when to plant. The majority of these food plots are on the edges of hardwoods. This one, in particular, has been low fenced to keep the hogs out.

2. Built A Dove Field

Having a great dove field is a great way to host guests, family, and friends for entertainment. It’s a fun social event you can put on several times a year. This dove field has all the makings for being successful including a fake power line and trees for the birds to roost, water to drink, sand/gravel, and approximately 12 acres to plant.

 

 

 

 

3. Created A Duck Impoundment

Since this property sits along the eastern flyway, this duck impoundment is ideal to attract passing ducks. This impoundment is planted in June and the water level is manually controlled through a flashboard riser. The owners are able to enjoy it from early teal season in September, all the way to the end of the season in February.

 

 

 

 

4. Created Quail Habitat

This required thinning the trees back to 35-50 trees per acre. A skid steer with a grinder ate up a lot of the long-abandoned understory before Garlon (Triclopyr) was sprayed to prevent hardwood growth. These fields were burned using prescriptive fire in late February. Continuing to burn every one or two years will keep this stand clean and provide great habitat for all wildlife.

 

 

 

 

5. Building A Fishing Pond

This pond was started almost a year ago. The owners were able to reach a mutual agreement with a local contractor and the Department of Transportation. The agreement allows the two parties to have free rights to the dirt in order to finish converting a nearby roadway from two lanes into four. Once completed the landowners will have a 17.5 acre stocked pond to enjoy year-round fishing.

 

 

 

 

6. Starting A Garden

Establishing a garden requires a lot of work. However, it is very enjoyable to be able to eat what you have grown. This garden contains a mixture of fruit trees including blueberries, blackberries, peaches, limes, nectarines, oranges, apples, pears, and grapes. It also has a seasonal section that is currently planted in corn, squash, cucumbers, peppers, okra, bush beans, cantaloupes and watermelons.

While there are certainly several other recreational aspects to add to a property, I thought this property did a great job of highlighting many of them and a great example of maintaining a timber investment and year-round recreational enjoyment.

Interested in becoming an expert in recreational land transactions? Check out the RLI’s Recreational Land Real Estate LANDU course.

This post is part of the 2018 Future Leaders Committee content generation initiative. The initiative is directed at further establishing RLI as “The Voice of Land” in the land real estate industry for land professionals and landowners. For more posts like this, click here.

Fixer-Upper: How to Budget a Home Renovation Project

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Fixer-Upper: How to Budget a Home Renovation Project

how to budget a home renovation

Now that the economy is regaining its strength, more and more people are becoming interested in investing in their homes through renovations. While you can certainly increase the value of your home while making it more comfortable through a renovation, you’ll also want to make sure that you spend the right amount of money so that you don’t dig yourself a hole you can’t get out of while also having the ability to make the alterations you want.

Determine What Financial Resources you have Available

Your own financial situation will have an effect on how much you should spend on your home renovation. Oftentimes, when families don’t have enough in savings for a renovation, they pay for repairs and projects they can’t afford. An alternative to going into debt because of your renovations would be to go over your finances and figure out what projects you could afford each month. Then, if you are using a contractor, you can sit down with them and create a calendar that goes along with your budget—planning a project or two each month according to what you can afford.

Determine What Effect your Improvements will Have on the Value of your Home

The amount your improvements will increase the value of your home is affected by what areas you choose to renovate. The amount of your home’s value comprised by each room in the general case is as follows:

— Finished attics or basements: about 10 to 15 percent.

— Kitchens: about 10 to 15 percent.

— Full bathrooms: about 5 to 10 percent.

— Half bathrooms: about 5 percent.

Determine How Much to Spend on Each Room

Usually, it’s best not to spend more on one room than the amount a room will contribute to your home’s total value. This means if the value of your home is $600,000, and you’d like to renovate your basement, you shouldn’t spend more than 10 to 15 percent of $600,000, or $60,000 to $90,000, on the renovation. Otherwise, you might not be able to get the money you spend back.

Do Your Homework

If you aren’t familiar with home renovation and aren’t sure about how much certain projects, equipment, parts, or labor should cost, don’t go blindly into the process or you could get ripped off. With the world wide web at your fingertips, look at sites like Houzz.com for design ideas and remodeling tips, and then consult contractors to get multiple estimates. Before you start renovating your home, make sure you do your homework in order to ensure that your money is well spent and you get what you want.

Save Money Wherever You Can

You can use a few common-sense techniques in order to save money painlessly on your renovation. First, do work yourself whenever you can. Putting your skills to use and applying paint, installing trim or crown molding, putting in new windows, or doing other work can save you thousands of dollars. Avoiding the removal or addition of walls and not making dramatic changes to the footprint of your home will do the same thing. However, doing your own work will only save you money if you know what you’re doing.

By putting these ideas to use, not only will you be able to get the most out of your investment, you’ll have a more comfortable space that you and your family can enjoy. Whether you’re staying in your home or planning to sell, a renovation done correctly and with a correct budget can produce lasting and satisfying benefits.

 

written by: Dixie Somers

 

 

 

Preferred Properties of Texas

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